It has been a mixed trading session overnight, with bond and currency markets adopting a cautious tone, but US equities rebounding (to flat) after a poor start. The NZD has drifted a bit lower – not much, but enough to take it down to its lowest level in a few weeks.
US equities opened on a weak note that saw the S&P index down as much as 1.9%, before more than recovering all of that loss, to be currently flat. There hasn’t been a lot of news to trade off, but the initial cautious tone followed another weak US jobs report and evident US-China tensions.
US initial jobless claims for last week were higher than expected, taking the cumulative total to 36m workers over the past eight weeks. That the trend rate of increase is slowing is only a small consolation to the dire state of the US labour market. US rates have drifted lower, seeing the US 10-year Treasury getting down near 0.60%, now currently just above that level and down 4bps on the day.
Poor US-China relations have remained in the headlines. In a Fox news interview, President Trump said he didn’t want to talk to President Xi right now and he wondered out aloud what would happen if the US cut off its “whole relationship” with China, “…you’d save $500m”. Trump was also “looking at” Chinese companies that trade on US bourses but do not follow US accounting rules. This has followed recent news of the US extending its ban on Huawei for another year, Trump blaming China for the “plague” (COVID19), and the US retirement fund for federal workers deferring a change in its new benchmark for international equities that would include Chinese stocks.
Oil markets are having a good day, after the International Energy Agency said that the outlook for global markets is improving with demand a little stronger than expected. BP said that consumption has surged this week as cars return to the roads. Brent crude is up over 6% to USD31 and a close around this level would be the best in a month.
Focusing on NZ, jobs ads plunged by 65% y/y in April, as the country entered the severe alert level 4 lockdown. But the feature of the day was the NZ Budget, which showed that the government wasn’t holding back with its COVID19 fiscal response, with an additional $50b of spending on top of the $12b already announced. This takes the total response to some 20% of current nominal GDP (and ultimately larger on this metric, as the economy will be some 20% smaller at its nadir).
This was a greater fiscal easing than expected – we had assumed gross debt would end up around 60% of GDP by FY24 and the government projects that to be 74%. This implies a much larger bond tender programme, including an additional $10bn required for FY21. With RBNZ QE policy constrained by a self-imposed limit of not holding more than 50% of government bonds on issue, this will ultimately require the private sector to hold more bonds and become the marginal buyer at some stage, after RBNZ bond purchases taper. We estimate that even with the RBNZ’s upsized QE programme, the market will need to absorb $6-11bn of net NZGB supply in the next fiscal year (2 to 4% of GDP), and this will ultimately reset longer-term NZGB yields higher.
The higher projected debt track saw NZ’s 10 year benchmark bond (2031) shoot up 10bps from its pre-Budget level, but a big reversal ensued, taking it back down. The overall 6bps rise for the day simply reflected the pre-Budget move higher, reversing some of the previous day’s post-MPS rally earlier in the day. Longer dated bonds increased more, while swap rates rose in sympathy, but to a much lesser extent. Many commentators were claiming that a larger fiscal response eases the burden from monetary policy, reducing the chance of the RBNZ taking the OCR negative next year. But this wasn’t evident at the short end of the curve, which didn’t buy into that view.
Under normal circumstances, prospects of such a large fiscal easing would be NZD-positive. We did see an initial positive reaction, in the order of 20pips or so, but a stronger USD overnight has seen that small gain wiped out. The NZD reached a 3-week low of 0.5957 overnight and it isn’t currently much higher than that, seeing it down 0.2% from this time yesterday, a fairly modest movement overall. The move lower in the NZD over the past couple of days has broken the slight upward trend (evident in higher lows over the past couple of months), but still well within the familiar 0.5840-0.6170 range.
Currency movements for the majors over the day have been modest overall, with a positive USD bias, and only CAD outperforming, supported by higher oil prices.
Yesterday, Australian employment showed a large expected fall, but the unemployment rate “only” rose to 6.2%, with a record number of workers dropping out of the labour force – if those workers had remained in the labour force, the unemployment rate would have been much higher at 9.6%. The 9% plunge in hours-worked better captures the hit to household income. The fall in the AUD after the report has been sustained and it trades this morning around 0.6430.
Bank of England Governor Bailey said that the Bank isn’t currently considering lowering interest rates below zero, as it would prove difficult for banks. The BoE joins the other group of wise central banks – the Fed and RBA – deciding that negative rates can do more harm than good, with the experience of the euro area and Sweden noteworthy in this regard. Bloomberg noted comments by BoJ Governor Kuroda yesterday that lowering interest rates (taking the policy rate below zero) was lower down the pecking order as he rattled off the Bank’s further possible policy options, with rates coming after further QE and market operations.
In the day ahead, anything other than a plunge in the NZ manufacturing PMI would be a surprise as it captured a large part of the lockdown, with the previous figure some two months dated after the March survey wasn’t held. Chinese activity data will be watched for signs of improvement, while German and euro area GDP data tonight will show the initial effects of the lockdowns that began late in Q1.
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This was a greater fiscal easing than expected – we had assumed gross debt would end up around 60% of GDP by FY24 and the government projects that to be 74%. This implies a much larger bond tender programme, including an additional $10bn required for FY21. With RBNZ QE policy constrained by a self-imposed limit of not holding more than 50% of government bonds on issue, this will ultimately require the private sector to hold more bonds and become the marginal buyer at some stage, after RBNZ bond purchases taper. We estimate that even with the RBNZ’s upsized QE programme, the market will need to absorb $6-11bn of net NZGB supply in the next fiscal year (2 to 4% of GDP), and this will ultimately reset longer-term NZGB yields higher.
Can't get enough of them in the US
In the middle of March, for example, while GFC2 was raging all around, the collateral bottleneck obvious to everyone except central bankers and members of the mainstream media, Treasury conducted a 10-year auction in which 5% of all bids were accepted at or below 8 bps, competing with T-bills; a feat, by the way, that was repeated in April.
Again, if there were “too many” of these bonds then we’d see the high yield rather than the low moving out and away from the range. At times – such as late last year or during 2018’s landmine – there’s an even larger bid, an obviously one, where buyers are lining up to pay extraordinary premiums in order to get their hands on the most liquid, on-the-run issues.
Why might that be, I wonder? Link
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